Global Real Estate Consultancy, Cushman & Wakefield’s latest report on private equity (PE) investments in real estate revealed that total inflows  from private equity funds in the real estate sector for 2013 was recorded at INR 7,000 crores (USD 1.1 billion), an increase of 13% compared to 2012 (INR 6,200 crores / USD 1.2 billion). Overall private equity investments across sectors in India have also increased by 11% from USD 9.49 billion in 2012 to USD10.5 billion in 2013[1]. The increase in private equity inflows was primarily due to rising investments in residential assets and other sectors like retail and hospitality. While the number of deals has increased to 40 in 2013 compared to 34 in 2012, the average deal size has declined marginally and was approximately INR 175 crores (USD 28 million). Given the difficult economic conditions, developers are finding it increasingly difficult to raise capital through traditional sources and are opting for alternate sources. 

The total Foreign Direct Investment (FDI) inflow in Construction Development for the third quarter of 2013 was noted at INR 3,200 crores (USD 520 million), which is the highest quarterly investment since Q3 2009. FDI inflow for the first three quarters of 2013 in Construction Development was INR 5,500 crores (USD 900 million), a 25% increase from the same period in 2012. Contribution to overall FDI by the construction development sector was comparatively higher at 9% in Q3 2013 compared to 3-4% in the first two quarters. SEBI has also announced draft regulations for REIT’s in the country; the move will help organised investments in non-residential developments. Once implemented, REITs will broaden the real estate market and increase the influx of funds into organised real estate. 

GDP growth rate for FY 2014 is expected to be in the range of 5.5-6.2%; considering the reducing fiscal deficit and expectations of dip in inflation, the GDP growth is expected to pick up post elections. Inflation has also shown the first sign of declining, which will reduce pressures on interest rates. With interest rates stable, both the Nifty and the BSE’s Realty Index witnessed appreciation in the last quarter of 2013. The realty index grew by approximately 24% in Q4 2013. Overall net-absorption in the commercial office sector has been lower in 2013; primarily due to high relocation and consolidation activity with occupiers moving to better quality, larger and cheaper spaces in the suburban and peripheral locations. This trend suggests that Grade A developments located in these markets have a high potential to provide stable yields in the coming years.  

Commenting on the report, Sanjay Dutt, Executive Managing Director South Asia, Cushman & Wakefield said, “A number of large global investors, including a number of sovereign funds, have taken the first move by partnering with successful local investors and developers for investing in the Indian real estate market. This is expected to result in high transaction activity especially in income yielding commercial office assets during 2014.”

Sanjay further said, “The residential asset class continues to provide tremendous potential for growth in the coming years. With housing requirements growing across cities and funds investing in the asset class primarily in the form of NCDs providing fixed returns, investments in the right project have the potential to yield healthy returns.”

While one transaction each in the retail and hospitality sectors was witnessed in 2013 in Pune and Bengaluru, 2012 had no transactions being executed in these sectors. Despite slower growth in the economy, interest from both foreign and domestic funds in commercial office income yielding assets as well residential assets through structured deals providing fixed returns was noted. With increasing commitments from foreign funds, investments in commercial sector are expected to increase in 2014. Real estate funds have also been very successful in raising funds, from both domestic and international investors, which are likely to be deployed in 2014 and could result in high investments especially in the commercial office sectors.  

Approximately 77% of the overall investments during the year were witnessed during the second half. The total value of investments in the commercial office segment for 2013 was recorded at approximately INR 2,500 crores (USD 400 million), which is a decline of 23% compared to 2012. Although the sector has had a lower contribution to overall investments at 35% in 2013 compared to 47% and 52% in 2011 and 2012 respectively, investor interests in the asset class remain high. A number of foreign investors have committed investments towards funds targeting commercial office assets, thus transactions in this sector are expected to increase in 2014. Considering the attractive valuations of assets, stable expected yields and growing demand for space, the investors are actively evaluating prime office assets across the top cities. There is a clear preference for investments in leased office spaces with over INR 8,350 crores (USD 1.6 billion) invested in the segment since 2011. 

The total value of investments in the residential segment for 2013 was recorded at INR 4,050 crores (USD 650 million), an increase of 42% compared to 2012 levels. The sheer size of the residential sector has always led to the asset class contributing significantly to overall investments over the years. Low demand for residential units remains a challenge for the sector with launches declining by 13% in 2013.  The sector contributed 58% to overall investments in 2013 compared to 42-46% in 2011 and 2012. Total number of deals in 2013 has also increased to 35 from 25 each year in 2011 and 2012. Average deal size in the residential sector has remained stable at approximately INR 116 crores (USD 19 million).  

Bengaluru continued to witness the highest level of transaction activity in 2013 with overall investments of approximately INR 2,200 crores (USD 350 million), though it declined by 33% from 2012. Both Pune and NCR witnessed an increase in transaction volume in 2013. Overall investments in Pune were INR 1,460 crores, recording an increase of over four times from 2012, driven primarily by investments in leased office assets. Transaction volume for NCR in 2013 was more than double that of 2012 at approximately INR 1,650 crores (USD 260 million), all of which was in the residential asset class.

Mumbai witnessed a decline of approximately 15% in investments for 2013 to INR 1,100 crores (USD 180 million). However, investment activity in the city is expected to increase with a few large deals in office assets being currently in the pipeline.